Peter Cummings, the man who broke HBOS with a £7bn loss

Last night on BBC’s Newsnight Alistair Darling, the Chancellor, defended both the Government’s role in pushing through the Lloyds takeover of HBOS last October without due diligence and the subsequent £17 billion taxpayer-funded bailout of the merged entity.

“The problem was that last October the banking system was facing imminent collapse,” he said. “We had no alternative but to intervene quickly.We had a matter of days and then hours to stop the entire banking system collapsing. Since then many other countries have done the same thing. The alternative was to let HBOS go down and last October [at such a critical point] the damage would not have stopped there.”

Peter Cummings, left, at a dinner with the Top Shop owner Sir Philip Green in 2007. Mr Cummings was the head of corporate lending at HBOS and the bank’s highest-paid director (Jeremy Young)

HBOS’s aggressive corporate banking division was revealed to have been at the heart of the £10 billion shock loss announced by Lloyds Banking Group yesterday.

Lloyds Banking Group issued a warning that HBOS, the ailing bank it has taken over, made a whopping £7 billion of corporate losses last year after making bad bets on business lending.

Lloyds admitted that HBOS’s corporate division, which was run by Peter Cummings – the highest-paid executive at the bank – has had to write off £7 billion of bad loans, far more than HBOS’s management ever admitted. Mr Cummings is understood to have left in early January with a payoff thought to be about £660,000 and £6 million of pension entitlements.

The announcement leaves taxpayers facing billions of pounds of extra losses on their rescue of Lloyds and HBOS, while politicians are now warning that it is inevitable that the Lloyds Banking Group will need more government money to keep it afloat.

Vince Cable, the Liberal Democrat deputy leader, told The Times: “These figures confirm how big the problem is and it seems impossible to believe Lloyds can survive without further government funding.”

Taxpayers have already sunk £17 billion into the two banks.

After a lunchtime announcement that caught traders on the hop, Lloyds shares – the most widely held share in Britain with more than three million small investors – crashed 29.5p to 61.4p as the bank admitted that assets in HBOS were worth far less than it thought when it sought approval from shareholders for the controversial merger, brokered personally by Gordon Brown.

The Times estimates that taxpayers have lost more than £8.3 billion as a result of the Government’s investments in Lloyds TSB and HBOS.

Assuming that Britain has a population of 60 million, that equates to a paper loss of £143 for every man, woman and child in the country.

Last night on BBC’s Newsnight Alistair Darling, the Chancellor, defended both the Government’s role in pushing through the Lloyds takeover of HBOS last October without due diligence and the subsequent £17 billion taxpayer-funded bailout of the merged entity.

“The problem was that last October the banking system was facing imminent collapse,” he said. “We had no alternative but to intervene quickly.We had a matter of days and then hours to stop the entire banking system collapsing. Since then many other countries have done the same thing. The alternative was to let HBOS go down and last October [at such a critical point] the damage would not have stopped there.”

The timing of the profits warning was particularly embarrassing for Eric Daniels, the Lloyds chief executive, who did not mention the huge losses only three days ago when he appeared before the Treasury Select Committee.

Mr Cable said: “Daniels must have known about this.” It is also acutely embarrassing for Sir Victor Blank, the Lloyds chairman, who – with Gordon Brown – is regarded widely as the architect of the HBOS takeover. Sir Victor told the Sky News Jeff Randall Live programme less than a month ago that the bank had “come clean” on its toxic assets.

However, it is understood that the Financial Services Authority (FSA) was aware that losses could be this bad at the time of the first bailout in October because they used similar figures when stress-testing HBOS to assess its capital requirements. Lloyds said that the losses were £1.6 billion worse than its expectations in November, when it set out to the shareholders its reasons for buying HBOS.

Roger Lawson, of the UK Shareholders’ Association, which represents the interests of private investors, said: “Lloyds TSB shareholders will say to directors, ‘We told you this was a mistake but you ignored us’. It was a mistake to take those HBOS assets.”

Mr Lawson said that it would now be appropriate for Sir Victor or Eric Daniels to step down.

He added: “I would certainly like to see Victor Blank go and I think Eric Daniels should now probably go too.”

City analysts said that the situation for Lloyds looked extremely bleak. Bruce Packard, of the broker Evolution Securities, said: “I suppose it is a comment on the UK banking sector that Lloyds can describe a two-thirds fall in profits for the second half of the year, from the first half, as ‘trading satisfactorily’.”
It has emerged that the Bank of England and the FSA were warned years ago that financial companies were failing to stress-test themselves rigorously well before the financial crisis hit.

In a speech this week, Andrew Haldane, executive director for financial stability at the Bank of England, said that a banker told officials from the Bank and the FSA that there were no incentives for risk managers to highlight potential problems.

The warning came during a seminar on stress-testing for financial firms run by the Bank and the FSA.

Mr Haldane said that one banker explained that severe stress-testing was not worthwhile because if a serious shock took place in the economy risk managers would lose their jobs and bonuses anyway. In addition, many reasoned that if such a key event occurred, the Government would have to step in to save banks and other struggling firms.

“History now tells us that the unnamed banker was spot on,” Mr Haldane said.